Longlead Capital Partners, the boutique long/short equities manager formed by two key players in the success of Regal Funds Management, has launched a traditional unlisted unit trust to allow better access to its strategies among Australian and New Zealand investors.
Longlead, founded by Tim Campbell and Andrew West in 2014, has so far produced some stellar returns for its ‘Pan Asian Absolute-Return Fund’, a long/short equities strategy, alongside its more defensive market-neutral fund.
Like Regal, probably the recipient of more industry awards than any Australian hedge fund manager, Longlead started life with its market-neutral fund before adding the higher-octane absolute-return fund in July 2017. Since inception, the absolute return fund has produced an annualised return of 26 per cent, with positive results through both the up and down markets of the past three years.
Until the new unit trust vehicle was announced last week (November 23), Australian and NZ investors were limited to the Cayman Islands-domiciled and US-dollar-denominated absolute returns vehicle, which is the most common for hedge fund managers but less than an ideal for big wholesale and institutional investors in Australasia.
The unit trust has a minimum investment of $100,000, making it accessible for both the wholesale financial advice and institutional markets. Most of the firm’s clients have so far come from US and European institutions and Asian high-net-worth investors and family offices. There are Australian investors across both funds but not yet an institutional investor.
The market-neutral fund has about A$183 million and the absolute return fund about A$108 million under management. West says that New Zealand represents an important market for Longlead. He has held several conversations with larger investors and expects one to come on board soon with the new unit trust structure.
Campbell, who established Regal’s Asian presence from Singapore in 2012 is CIO and runs that eight-person office there, while West, the managing director of Longlead, remains based in Sydney in a two-person research office. He was a portfolio manager and deputy head of fundamental strategies for Regal. Roughly 20 per cent of the portfolio consists of Australian-listed stocks.
As a ‘pan-Asia’ strategy, the Longlead fund includes the additional developed market of Japan as well as Australia, whereas most similar managers exclude Japan from their Asian portfolios. The big long-term driver is, of course, China.
Campbell said there was no question that China was a key element in the appeal of investors looking to the region, as a compelling long-term proposition. He predicted that sectors poised to outperform in 2021 included renewable energy, electric mobility and 5G communications.
Asian markets also looked better value at current prices than US stocks in particular. Longlead includes price-to-sales multiples in its valuations, on top of traditional price-to-earnings ratios – at record levels in the US because of the big tech stocks and recession hit earnings in many sectors. Price-to-sales multiples are less sensitive to the stage of the economic cycle. Australia, Hong Kong and Singapore are still at or below average valuations for the last 10 years on that measure.
West says: “With our view of Asia and because we have a better understanding of the market and because those markets have a higher retail investor participation we think of and anticipate the cycles within the cycle.”
As an aside, that’s where the firm’s name comes from. It refers to the knack of elite sports people to be able to anticipate the speed and direction of play so that they can predict where a player, or ball, will be in a second or two.
He says: “The good thing about Asia is the depth of individual sectors. It’s still the hub of global manufacturing. We’ve spent 10 years identifying the supply chains and when the majority of participants are involved in a trend it’s a very good indicator.” The manager usually starts with a small position in a stock and builds it when it discovers more data points.
Another feature of its style is a higher turnover than most long-only managers – about five times a year – and a much higher active share (proportion not in the index) in the long part of the portfolio.
“There is better risk-rewards in the short term,” West says. “That’s what we did at Regal, where we also had very large active weights.”
He says Longlead is neither a growth nor value manager and tends to be out of a position by the time momentum comes into view. “We read momentum as ‘the crowd’, which has missed the best opportunity.”
Unlike a lot of long/short mangers it does not use any quant screens on the short side, preferring the same fundamental research as with the long side. An example of successful shorting was with the trade war between the US and China.
“This became evident late in 2017,” West says, “and in 2018 when Trump ratchetted up tariff policies a lot of companies became very concerned, so they cut their cap-ex. The implication was that that companies which sold into that would suffer. Some companies, such as Yaskawa, a Japanese manufacturer of electronic components, had been capitalising peak earnings at peak multiples because of momentum investors when the price fell and ETF money started to come out… It’s not about discovering accounting frauds, it’s about fundamental research.”
The first piece of the return to investors in such a shorting scenario is in the earnings surprise and the second piece is in a de-rating of the stock.
Longlead believes that trade tensions will remain in place under a Biden presidency as he first focuses on the domestic situation in the US and shoring up relations with the country’s allies. West says President Biden is likely to focus on multi-lateral agreements (rather than unilateral tariffs) and will use these to assist its agenda on things such as IP protection. But, overall, the Biden victory is good for the region.
By Greg Bright
Note: Longlead Capital is a sponsor of Investor Strategy News.